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May 22, 2007

Valuevision At Critical Juncture

Valuevision (VVTV), owner of the ShopNBC, the #3 home shopping channel, reported disappointing 1Q08 results after the close. Similar to QVC and HSN, ShopNBC had weaker than expected sales. VVTV has a high fixed cost base due to expensive distribution contracts it signed with cable and satellite providers. As a result, 5% sales growth translated into a small EBITDA loss.

In response, the company announced an across the cost savings program, expected to produce run rate expense reduction of $10 million once fully implemented. This is real money to VVTV as the company's new 2007 guidance calls for revenue growth of 6-8% and EBITDA of $15-20 million vs. $14 million last year. Additionally, the company announced a $25 million share buyback, enough to retire over 5% of the current outstanding shares.

VVTV is a stock I have owned personally for about a year and have owned on and off for clients over the past several years though I hold no position now. The market cap enterprise value is around $400 million, placing the per subscriber value at under $7. I think that represents real value to a third party but I am not sure there is a path to realize the value....

The company will be holding a conference call later this morning which should be interesting in light of the earnings report and the recent announcement that NBC is selling its equity in VVTV. NBC has exercised its demand registration rights but if a third party were to indicate interest in acquiring the shares, it could put the company into play. As far as I know VVTV still has not filed with the SEC to initiate a secondary offering of the shares.

VVTV has a very poor history of meeting its financial goals under several different management teams. It may be that being the #3 player in home shopping puts the company in too weak a competitive position as suggested by its expensive distribution contracts. Furthermore, the home shopping industry is facing pressures from internet shopping even as all three players have rapidly growing web shopping businesses of their own. QVC and HSN also recently reported slower than expected sales growth. It could be a weakening consumer or the internet impact or both.

Regardless, VVTV appears to be at a crucial juncture in its corporate history. There is no guarantee the outcome will be favorable for shareholders but I think this stock bears close watching, especially in the current of seemingly unlimited merger and acquisition activity.

Posted by Steve Birenberg at May 22, 2007 08:41 AM in VVTV